Top 3 Confusions Regarding GAAP’s New Public Business Entity Definition

Posted by Guest Blogger on Sep 04, 2014

Is your client’s organization considered a public business entity under the new U.S. GAAP definition? Queries sent to the AICPA’s Private Company Practice Section Center for Plain English Accounting indicate that members continue to struggle with whether or not their entity qualifies to use the Financial Accounting Standards Board’s new Private Company Council accounting alternatives.

Understanding whether a reporting entity is a PBE is the first step in understanding whether it can apply the PCC accounting alternatives. Some of the most common areas of confusion regarding an organization’s definition as a PBE surround broker-dealers, equity-method investments held by PBEs, and governmental units or entities. The following explanations should help to clarify when to use PCC accounting alternatives.

Broker-Dealers. Brokers and dealers in securities regulated by Rule 17a-5, as well as non-issuer broker-dealers filing with the SEC, are considered to be PBEs. As such, they are not allowed to use the private company accounting alternatives since they are required to provide financial statements or furnish financial information to the SEC.

Equity-Method Investments Held by PBEs. It is not uncommon for PBEs to hold financial interests in investee entities where the financial interests result in PBEs having the ability to exercise significant influence over the operating and financial policies of the investee entities. In these situations, PBEs would need to account for the equity method investments using the guidance in FASB ASC 323, Investments – Equity Method and Joint Ventures. While the equity method investees might not be PBEs in their own right, they would be considered PBEs in that their financial information is included in the financial statements of investor entities that are PBEs.

Other Governmental Units or Entities. Governmental entities that are required to follow guidance promulgated by the Governmental Accounting Standards Board are not allowed to use the FASB private company accounting alternatives. Other governmental units or entities that are not otherwise considered to be PBEs can elect use of the accounting alternatives.

Currently, when reporting entities qualifying to use the private company accounting alternatives need to provide financial statements to governmental agencies, use of the available accounting alternatives is acceptable.

Even when private companies are not considered to be PBEs and when there are no plans associated with becoming PBEs, it’s important to exercise care to ensure that users of private company financial statements would accept statements using the private company accounting alternatives before even attempting to use the accounting alternative treatments.

Need more information? The CPEA special report also addresses issues such as: